Channel Selection in a Gray Market Setting: Considering the Export Tax Rebate

Abstract

This paper examines the influence of gray market on manufacturer’s channel selection when considering the export tax rebate. A two-country, three-stage model is used to investigate manufacturer’s optimal operation strategy. We get the equilibrium outcomes through a Stackelberg game in different scenarios. The results show that the Company U may have incentive to encourage gray market if market demand ratio and product differentiation satisfied some condition. In a gray market setting the manufacturer prefers external sales channel with the two-part tariff contract first, a direct channel second, and external sales channel with wholesale price contract third. The study also shows that the policy of the export tax rebate will enhance manufacturer’s profit and increase sales volume of gray market goods. In the extension, if manufacturer selects the direct channel, he can achieve optimal profit by giving decision power to sales department to determine retail quantity. Because the transfer price given by the manufacturer can convey signals of domestic market competition.